Tuesday, January 15, 2008

Chris Larsen, Chief Executive Officer and Co-founder of Prosper said, "2007 proved to be a pivotal year for US markets as we abruptly transitioned from optimism to fear of imminent recession." This remark matches statements made in earlier Prosper monthly lending reports such as September's "flight to safety" remarks. We have previously discussed what effect a recession might have on the Prosper marketplace here on PLR. This is the full text of Larsen's remarks in January's lending market survey.

"2007 proved to be a pivotal year for US markets as we abruptly transitioned from optimism to fear of imminent recession. Who could have predicted at the start of 2007 that the word 'subprime' would be voted the word of the year?

At Prosper, we also saw a dramatic switch in the prime versus subprime market with subprime declining from over 25% in 2006 to barely 5% currently. This change reflects both a changing external market as well as a maturing of the Prosper marketplace.

Obviously the subprime meltdown exposed much more risk in the subprime market in 2007 compared with a year earlier. Prosper’s performance data bore this out and has clearly moved people to safer ground or to fund those borrowers with a clear social capital benefit.

The silver lining has been more opportunity in the prime and near prime segments. As the credit crunch has unfolded, many traditional lenders have dramatically tightened or eliminated credit to even their best customers. For example, home equity, which until recently was referred to as Americans’ ATM, has been substantially limited by falling real estate prices and mortgage industry bankruptcies. Credit card offers have also been substantially reduced as defaults have spiked nearly 20%. Thus, while the environment was tougher in 2007, there is also much less competition for the best customers. This bodes well for people-to-people lending which can take up the slack from the seized-up capital markets.

The key focus for loan buyers will be choosing borrowers smartly and pricing adequately for risk. Prosper’s additions of Prosper-specific market risk data and Portfolio Plans were both major milestones in giving bidders the information they need to choose wisely. For borrowers, pricing their listings adequately, telling and explaining their story honestly, and involving friends and family to bid as a measure of social capital are great ways to increase the success of their auctions."